The Underlying Technological Dynamic:
Moore's Law

The foundation of the new economy is the revolutionary explosion
of computer processing power.

Back in 1965 Intel Corporation founder Gordon Moore projected
that the density of transistors that could be placed on a silicon
chip would double every twelve months. (He was overoptimistic:
now people say every eighteen months.)

Information processing power grows along with transistor
density--and the cost to make a chip of given size stays roughly
constant.

And Moore's Law still has at least another ten years--seven
generations--to run.

Our computers today have 66,000 times the processing power
at the same cost as the computers of 1975. Our computers in 2010
will have ten million times the processing power of the computers
of 1975.

The Price of Computers
Has Fallen More than Ten Thousand-Fold in a Single Generation

generation; the price of semiconductors has fallen even faster.

Such steep price declines produce enormous problems of measurement
in calculating the rate of economic growth.

How to resolve this index number problem? If we value computers
at today's (low) price, we grossly underestimate the value and
utility of the first expensive machines. If we value computers
at yesterday's (high) price, we grossly overestimate the value
and utility of machines that today are often used mostly to run
screen saver programs and play solitaire.

This is just one of the reasons that national income accountants
despair of ever producing a consensus estimate of the impact
of the computer revolution on GDP.

The measured productivity performance of America's
whole economy--the rate of increase in labor productivity in
all of nonfarm business--has not been especially impressive in
the 1990s: only some 1.6% per year.

The measured productivity performance of America's
information technology industries has been much more impressive:
an average annual rate of increase of value added per worker
of nearly 11% per year.

And the measured productivity performance of those
industries that produce information technology goods--semiconductors,
fiberoptics, and so forth--has been astonishing: an average annual
rate of increase of value added per worker of nearly 25% per
year.

Since the beginning of the industrial
revolution, at any one moment technological change is strongest
in a particular few "leading sectors."

Different sectors lead economic growth at different moments
in time.

Is our current era of computer- and network-driven technological
change just another such episode? Or are we today in the middle
of a deeper structural transformation?

The Volume of Semiconductor
Production Is Doubling Every Eight Years

Worldwide shipments of semiconductors reached 300 billion
this year.

The total volume of worldwide semiconductor production is
growing at 8.5% per year--fast enough to double every eight years.

The increase in the unit volume of shipments understates
the increase in total production by an order of magnitude. Today's
semiconductor products are much more sophisticated than those
of fifteen years ago. Back then semiconductor products had only
one-thousandth as many transistors per square centimeter as today's
semiconductor products.

Back in the early days of networking--in
the 1960s and 1970s--it was thought that high-speed data communications
would require special data-friendly phone lines: ISDN or some
similar service.

It was expected that "ordinary" phone lines used
for POTS would be capable of carrying data transmissions at the
103 standard 300 bits per second, or perhaps at most the V.22bis
standard 2400 bits per second, but no faster.

Yet over the past two decades we have seen a 22-fold increase
in the speed of data transmission obtained over ordinary
telephone lines.

This extraordinary 18 percent per year improvement in data-transmission-over-POTS
is not the pace of Moore's Law, but it is very rapid. It allows
everyone with a phone line today the potential to connect at
speeds that 20 years ago it was thought would require expensive,
dedicated equipment.

This tremendous improvement in standard modems has greatly
fueled the growth of the internet. It has allowed the build-out
of the world wide data network on top of the already-existing
phone network.

It has thus shaved a telephone-equipment generation off of
the time it would have otherwise taken to wire the United States
for the internet.

And looking forward, at least half the phone lines in the
U.S. are suitable for high-speed DSL service. And approximately
three-quarters of the households not suitable for DSL service
are potential customers for cable modems.

Source: Kim Maxwell (1999), Residential Broadband:
An Insider's Guide to the Battle for the Last Mile (New York:
John Wiley and Sons).

The
Number of Households with Internet Access Is Doubling Every Three
Years

Some 66 million households worldwide will have internet access
by the end of 2000.

It takes less than three years for the number of households
with internet access to double.

Back in the mid-1990s more than two-thirds of households
connected to the internet were in North America.

By 2005 less than half of households connected to the internet
will be in North America.

Source: Jupiter Communications.

According
to the University of Texas, in 1998 $330 Billion of Economic Activity
Belonged to the Internet Economy

The University of Texas's Center for Research in Economic
Commerce, in a study funded by Cisco, has estimated the internet
economy at $301 billion of value in 1998.

They attribute 1.2 million jobs to the internet economy as
well.

Note that the University of Texas estimates are fully three
to four times the size of the Progressive Policy Institute estimates,
once one takes account of the different periods covered.

To our minds the major lesson of the U.T. study is that soon
it will be impossible to talk about an "internet economy."
The internet will be so much a part of daily life that it will
be as impossible to separate out the internet economy as it is
to separate out the electricity economy.

Source: University of Texas Center for Research in
Economic Commerce (1999), "Internet Indicators" (Austin:
U. of Texas); http://www.internetindicators.com/

According
to the Progressive Policy Institute, the Internet Economy Is Now
at Least $135 Billion a Year

The Progressive Policy Institute has estimated that $135
billion of value added was provided by the "internet economy"
in 1999.

They project that a year and a half hence--in 2001--that
the internet economy will generate $360 billion of value added.

Nearly a third of the current internet economy is made up
of business-to-business transactions.

The Progressive Policy Institute's projections are for that
share to grow: to half of the internet economy over the next
eighteen months.

The Speed of the Information-Processing
Revolution Dwarfs the Speed of the Electric-Power Revolution

How does the information-processing
revolution compare to other, previous waves of innovation? Let's
compare the past forty years of progress in information processing
with the replacement of the steam engine by the electric motor.

This was roughly a forty-fold increase in mechanical power
in seventy years--a five percent per year increase in muscle
power.

At the end of the 1950s, when computers had largely replaced
electromechanical calculators, there were roughly 2000 installed
computers in the world--machines like Remington Rand UNIVACs,
IBM 650s or 702s, or the DEC PDP-1 with processing power that
averaged perhaps 10,000 instructions per second.

Today--forty years later--there are approximately 200 million
active computers in the world with processing power that averages
approximately 100,000,000 instructions per second.

This is a million-fold increase in forty years--a thirty-five
percent per year increase in information processing power.

Total
Trade in Information Technology Is Doubling Every Six and a Half
Years

The total volume of American
trade--imports and exports--in information technology is now
doubling in less than seven years.

Trade in information technology goods is still some
twelve times larger than trade in information technology services--but
that won't last long: services trade is doubling every four years
while goods trade is doubling every seven.

Information technology trade will amount to a quarter of
all U.S. trade by the year 2000.

America benefits not just from information technology exports
but from information technology imports as well: imports give
downstream manufacturers the power to build better, cheaper products,
and they give users the power to perform their information processing
and data communication tasks.

Source: Department of Commerce, Bureau of Economic Analysis

The Dynamo Came to American Manufacturing Half a Century
After Its Invention

Even though the basic technologies of electricity were nineteenth-century
technologies, it was not until well into the twentieth century
that American industry became electrified.

Between 1910 and 1930, American manufacturing shifted from
being 25% to being 80% driven by electric motors.

The additional flexibility for organizing the factor floor
made possible by electric power had consequences: one of them
was called "mass production."

The Direct
Contribution of Computers to Economic Growth Has Become Large

Back in July 1987 economist
Robert M. Solow wrote in the New York Review of Books:
"How come we see the computer revolution everywhere except
in the [aggregate] productivity statistics?"

One answer has been that economic growth is underestimated--that
the areas in which computers have greatly multiplied productivity
have been areas in the service sector in which measurements of
output are the worst.

A second answer is that the U.S. economy is very large, and
that until the 1990s investments in information processing were
not all that large a share of total investment: hence we would
not have expected a large contribution from computers to measured
GDP.

But in the 1990s--even with potential underestimates, and
even with flaws in the statistical system (like those that count
investments in software as a current cost of doing business rather
than as investment proper)--the contribution of final sales of
computers to GDP growth has become quite large. Without growing
sales of computers, economic growth over the past six years would
have been half a percent per year lower.

Total Federal Spending on Research and Development
Has Been Falling as a Share of GDP

Back in the 1960s and 1970s,
federal spending on research and development averaged one and
a half percent of GDP.

By the mid-1980s the U.S. government had already scaled back
its relative commitment: research and development spending then
was only about 1.15% of GDP.

The macroeconomic policy mistakes of the early 1980s left
the United States with huge federal budget deficits. As a result
federal spending on research and development has come under further
pressure.

Today federal spending on research and development is only
0.8% of GDP.

Only health and medicine have avoided stringent cutbacks.

The extremely tight "discretionary spending caps"
that will govern the congressional budget debate over the next
five years will place enormous further downward pressure on federal
research and development spending.

Given the extraordinarily high returns earned by federal
investments in research and development during the Cold War generation,
is this really a sector of federal spending where we want to
economize?

In the 1980s and 1990s Measured Household Income
Has Stagnated for the Non-Rich

At the end of the 1990s, the
measured household income of those in the bottom fifth
of the American income distribution averaged less than the household
income of their predecessors at the start of the 1980s.

At the end of the 1990s, the measured household income
of those in the middle fifth of the American income distribution
averaged only five percent morethan the household income of their
predecessors at the start of the 1980s.

Yet the measured household income of the highest fifth of
Americans at the end of the 1990s was some 40% higher than that
of their predecessors two decades before.

Problems in measurement make it very likely that measured
household income growth understates true household income growth:
we have probably seen only real wage stagnation, not real wage
decline, in the past two decades among groups like white blue-collar
workers in America.

Nevertheless the remarkably increased spread of incomes in
the U.S. over the past two decades is a potential political fault
line. The "new economy" is almost surely not responsible
for it; but it may well be blamed for it.